Running out of fuel

like a slow-motion train wreck, the energy crisis is unfolding and hardly anybody has taken notice. Perhaps “hardly anybody” is not entirely true, but when you look at positioning in both natural gas and oil futures contracts, it seems that the recent rally, well, the recent rip in energy prices, has been met with traders taking short positions.

While speculating with mean reversion strategies is often touted as one of the more successful ways to trade the markets, in this case, it’s almost as if people are not looking at the fundamentals.

So, what we’ve spoken about supply constraints in the oil market, and particularly how the Covid-19 pandemic temporarily shifted demand dynamics to such a low level, and subsequently price, that some oil and natural gas producers basically went out of business. This only further exacerbated the supply constraints that the market was facing. Now that the world is “coming back to life”, we can see that energy demand is picking up considerably. Which has the market imbalanced and thus is fuelling higher energy prices.